The Effect of Price Caps on Advertising to Physicians: Evidence from the 340b Drug Pricing Program

We study the effect of price caps on the provision of costly effort by pharmaceutical firms using variation in drug discounts generated by a price regulation program that allows eligible hospitals to purchase outpatient drugs at steep discounts. These discounts directly affect drug manufacturers’ markups and may change firms’ incentives to exert promotional effort targeted toward physicians at these hospitals. We find that the effects of price regulation on pharmaceutical firm effort depend crucially on the design of the regulations and the multiproduct nature of pharmaceutical firms. Using detailed data on marketing payments from pharmaceutical firms to physicians, we observe that physicians receive 13% fewer promotional payments after their hospitals take up the program. The design of the price caps implies that discounts tend to increase with a drug’s age. Consistent with theoretical predictions, we find that pharmaceutical firms shift promotional payments away from older drugs and toward newer drugs, which are less affected by the price caps. For some drugs, this shift results in an increase in payments to physicians despite the price caps. Understanding these strategic, nonprice adjustments is important for policymakers seeking to design effective regulations targeting specific products.